Bitcoin is widely used globally as a speculative asset, as a transactional medium in emerging and developing economies, and as a store of value in areas with unstable domestic currencies, a recently published working paper has documented.Bitcoin, a decentralised digital cryptocurrency invented in 2009, holds nearly half of the global cryptocurrency market’s combined value. It not only acts as a speculative asset globally but also offers transactional benefits in emerging and developing economies (Emdes), particularly when domestic currencies in these economies are unstable, as revealed by a recent working paper by the European Central Bank.
Researchers from the European Central Bank, Paola Di Casola and Maurizio Michael Habib, along with David Tercero-Lucas from Comillas Pontifical University and Icade Business School in Madrid, demonstrated in their analysis that momentum and volatility in the cryptoasset market, as well as volatility and liquidity in global financial markets, are significant determinants of bitcoin trading.
The study examined bitcoin trading volumes against currencies from 14 advanced economies, excluding the US dollar due to its ‘special status’, and 30 Emdes, using data from Localbitcoins and Paxful, spanning from January 2018 to April 2022.
The results reinforced the prevailing hypothesis that bitcoin trading is driven by speculative motives, confirming it as a global phenomenon. The study identified a global crypto cycle in bitcoin trading against fiat currencies, where transactions across various currencies and user locations were influenced by fluctuations in bitcoin prices.
The paper also noted that bitcoin offers specific transactional benefits in Emdes, especially after the covid-19 pandemic. In these regions, bitcoin trading increased with the depreciation of domestic currencies, suggesting its value as a store of wealth or medium of exchange in economies experiencing a decline in their currency’s purchasing power, noted the authors. This implies that macroeconomic instability may spur greater cryptoasset usage and the fundamental value of bitcoin may differ significantly between advanced economies and Emdes, argued the researchers.
Furthermore, the study noted that proxies of banking depth and digitalisation are negatively correlated with the currency loadings on the global factor. This finding indicates that in Emdes, where traditional finance options are limited and the population is younger and more risk-inclined, cryptoassets may serve as an alternative to traditional financial avenues. The authors highlighted the potential financial stability risks posed by the increasing adoption of cryptoassets in Emdes, particularly those with underdeveloped financial systems and volatile fiat currencies.
While the inherent price volatility of bitcoin might limit its utility, the 56-page working paper concluded that the future might see a rise in the use of other cryptoassets, such as stablecoins, to provide more stable financial alternatives in these economies.